There’s nothing like an unsolicited takeover bid to get airline management moving. Fresh off one such rejected offer, reportedly from Wizz Air, EasyJet has unveiled plans to capture more share from legacy competitors and become a “local airline” brand in many other destinations across Europe.
London-based EasyJet’s growth plan has three legs. One, leverage and expand its leading position at slot-constrained airports in Western Europe — for example at Amsterdam Schiphol, London Gatwick and Paris Charles de Gaulle — versus legacy competitors. Two, build depth in destinations in places like southern Italy, Portugal and Spain in order to become a “local airline” in the eyes of local officials and tourism authorities. And three, add new focus cities in markets where it has a smaller presence, including Belgium, Ireland and Norway.
This growth, funded in part with proceeds from the roughly £1.2 billion ($1.7 billion) rights issue that launched on September 9, will “protect and strengthen EasyJet’s long‐term positioning in the European aviation sector,” the airline said.
And protecting its competitive position is very much top of mind for EasyJet. European budget leaders Ryanair and Wizz have both outlined ambitious growth goals fueled by the hundreds of aircraft they have on order. They too see an opportunity in the pandemic retrenchment of the continent’s major airline groups — Air France-KLM, IAG and Lufthansa Group. In July, Michael O’Leary, CEO of Ryanair, went as far as to say his carrier is the “only airline” capable of fully taking advantage of recovery growth opportunities.
EasyJet’s main strength is its competitive positions at many of key Western European airports. In 2019, the airline was number one at Gatwick and Milan Malpensa in terms of departures, and number two at Charles de Gaulle and Schiphol, according to Cirium schedule data. Slot limits at these airports make Air France, Alitalia — soon to be Italia Trasporto Aereo (ITA) — British Airways and KLM greater competitors to EasyJet than budget carriers. But outside these and other key markets, EasyJet’s ability to grow is limited without more planes.
According to a July presentation, EasyJet forecasts a fleet of 331 aircraft by September 2024, which is down from 342 aircraft at the same time in 2020 but up from a pandemic low of 307 planes. Gauge growth — 186-seat Airbus A320neos replacing 156-seat A319s and 180-seat A320s — will allow the airline to add seats and capture more share in key markets through 2024. But adding new routes and focus cities becomes a matter of robbing Peter to pay Paul without additional aircraft.
Ryanair and Wizz do not face that problem. Both have robust orderbooks that will allow the former to grow to roughly 600 Boeing 737s and the latter to 246 A320 family jets by 2026. Ryanair had 451 aircraft and Wizz 141 at the end of June. EasyJet has 101 Airbus A320neos and A321neos on order, plus options and purchase rights for another 78 A320neo family jets.
Adding planes and growing an airline requires capital. EasyJet had £2.9 billion in unrestricted cash at the end of June and, if proceeds from the rights issue come in as forecast, that number could jump by more than 41 percent to £4.1 billion. The airline also disclosed a new $400 million senior secured revolving credit facility.
Latam Seeks More Time for Restructuring Plan
The market got a look at Latam Airlines Group‘s expectations for the next five-years in its latest request for more time from a U.S. bankruptcy court. And they’re not great: Revenues, margins and capacity are not forecast to recover until 2024 as the Latin American travel recovery lags the rest of the world. That’s at least six to 12 months later than most other markets.
Despite the pessimistic outlook, Latam feels it is sitting in a good place in terms of its Chapter 11 restructuring. The carrier has met many of it cost cutting targets and is working on the “final elements” of its fleet transformation, which includes annual cash savings of 40 percent compared to two years ago, according to a July creditor presentation it submitted to the court on September 9. And it has received and is reviewing “several” proposals for more than $5 billion in exit financing. As a result, Latam is seeking yet one-month extension to its exclusive period to file a reorganization plan with the court, pushing the deadline back to October 15.
In terms of the fleet plan, Latam plans to emerge from Chapter 11 with 286 aircraft, or 54 fewer than when it filed in May 2020. This includes reductions to its Airbus A319, A320 and Boeing 767 fleets. Latam is also removing all of its Airbus A350s in favor of a widebody fleet made up of Boeing 767s, 777s and 787s. By 2026, the carrier plans to operate 331 aircraft, including the addition of 28 new narrowbodies.
Latam’s five-year plan bets on traffic from partner Delta Air Lines to help speed its recovery. It anticipates a 12 percent bump in long-haul traffic from the U.S. from Delta that will mostly offset a forecast 15 percent structural reduction in long-haul business travel as a result of the Covid-19 pandemic. Latam expects domestic markets in Brazil and Chile to recover to pre-crisis traffic levels by mid-2022 followed by recoveries in Colombia, Ecuador and Peru. In August, the airline’s Brazilian capacity was already at 77 percent of 2019.
“We will emerge from this process as a highly competitive and sustainable group of airlines, with a very efficient cost structure,” Latam CEO Roberto Alvo said in a statement. He added that the group would maintain its “unparalleled network and connectivity” in “all the markets it serves” — a comment that could be read as a subtle jab at Azul who has made public overtures to acquire Latam’s domestic Brazilian business.
Separately, Latam’s joint venture with Atlanta-based Delta took an important step forward apart from the restructuring last week. The two airlines reached an out-of-court settlement with Chile’s competition court for approval of their strategic partnership. The Chilean National Economic Prosecutor’s Office — the authority with final say on approval in the country — said the agreement is “sufficient to mitigate the anticompetitive risks.” Chilean objections were a fatal stumbling block for Latam’s previous proposal to form a joint venture with American Airlines.
JAL Raises $2.7 Billion for Budget Carrier-Focused Transformation Plan
Japan Airlines’ plan to return to profit by 2023 is getting a boost with a deal to raise up to ¥300 billion ($2.7 billion) in new capital to fund a transformation of its business.
That plan, called the Medium-Term Management Plan, sees the Tokyo-based carrier focus on growing its budget subsidiaries Jetstar Japan, Spring Airlines Japan and Zipair, while shrinking — or “optimizing” in corporate-speak — its full-service JAL brand. Capital will go to growing the discounters in each carrier’s target market: Jetstar in domestic Japan, Spring between Japan and China with an eye on inbound Chinese visitors, and Zipair on long-haul leisure travelers to Hawaii, Southeast Asia, and the Pacific Coast of North America. At the same time, JAL will see its fleet of large widebody aircraft shrink and a focus on resuming only “highly-profitable” routes with an eye towards its strategic partners American, British Airways, Finnair, Iberia and Malaysia Airlines.
Legacy carriers around the world face similar pressures as JAL. The leisure-first recovery has benefitted low-cost carriers and reinforced the strength of the model in the airline industry. Take Mexico for example, where budget carrier Volaris has used legacy carrier Aeromexico’s Chapter 11 bankruptcy restructuring in the U.S., and the demise of mid-market Interjet to accelerate its domestic growth plans and capture more share — a strategy that has proven successful thus far. Similar trends are underway in Europe and elsewhere around the world. This confirmation of the strength of the budget model has numerous legacy carriers looking for ways to grow beyond simply cutting costs. For example, British Airways is weighing whether to shift its entire London Gatwick operation to a new low-cost subsidiary.
JAL is not immune to these pressures and, as it acknowledged in May, its transformation plan aims to “address the changing market trends.”
To do this, JAL needs capital. The new financing is split between up to ¥200 billion in subordinated term loans split into two tranches, and up to ¥100 billion in hybrid bonds. Both loan tranches are set to price by the end of November, with maturities in 25 years. The carrier has not set a closing date for the bonds but the maturity will be 37 years.
The airline will funnel proceeds from the financing directly into its transformation plan. The top priority is to pay for the delivery of eight new Airbus A350s due by March 2024, which is the end of JAL’s 2023 fiscal year. The carrier already flies 10 A350-900s domestically and plans to introduce the A350-1000 on European and U.S. routes — where it will replace Boeing 777s — in 2023. JAL plans to retire 24 777s leaving it with just 13 aircraft by March 2024. The airline had outstanding orders for eight A350-900s and 13 -1000s at the end of August, according to Airbus orders and deliveries data.
Other uses for the new capital include investment in a new revenue management system, repaying debt, and to boost working capital.
JAL forecasts that leisure demand, both domestic and international, will recover by March 2024. Business travel, however, is expected to take longer to return. Despite the slower corporate travel recovery, the airline anticipates returning to pre-crisis earnings before income and taxes levels of roughly ¥170 billion by its 2023 fiscal year.
The carrier lost ¥57.9 million on revenues of ¥133 million during the three months ending in June. JAL ended the quarter with ¥408 billion in unrestricted cash and cash equivalents. Passenger traffic during the quarter was only 17 percent of two-years earlier, and capacity stood at 44 percent of 2019 levels.
Philippine Airlines Aims for Speedy Pre-Packaged Bankruptcy
Philippine Airlines (PAL) hopes to get out of Chapter 11 quickly with a plan ready to go when a U.S. bankruptcy judge heard its case last week. The pre-packaged plan follows months — years really — of talks with creditors to avoid the lengthy process other carriers have faced.
The Manila-based carrier has agreements in place with nearly all of its creditors, in addition to the agreed upon plan for its exit, it said in bankruptcy court filings. This will allow for, in the words of PAL Chief Financial Officer Nilo Thaddeus Rodriguez, a “swift and efficient reorganization” that could wrap within 180 days court documents show.
Such a timeline would be speedy for an airline PAL’s size. For comparison, larger Aeromexico, Avianca and Latam all continue to operate under Chapter 11 protection more than a year after their own respective filings. Only Avianca has a path to exiting bankruptcy at this time after filing a reorganization plan with the court in August, though Latam believes it is close to a plan (see above).
PAL’s bankruptcy comes as a surprise to few. The airline has undergone several out-of-court reorganizations that managed to improved revenues but not necessarily profitability. Prior to the pandemic in early 2020, executives told staff that the carrier needed to “find a way to profitability, reduce its debt, and achieve a higher level of competitiveness,” in order to “survive.”
Those comments came after almost a decade of budget competition eating its lunch. The domestic share of PAL, and its subsidiary PAL Express, shrank by 12.5 points to 29 percent from 2012 to 2019 — a period when overall domestic traffic grew nearly 44 percent to 29.5 million flyers — according to data from the Philippines’ Civil Aeronautics Board. Over the same period, market leader Cebu Pacific’s share shrank two points to 44 percent while Philippines AirAsia’s share grew by eight points to 18 percent.
At the end of August, PAL had just $28.6 million in unrestricted cash on hand, court documents show. That is paltry for an airline its size with 95 aircraft at the end of June, and a workforce of more than 3,000 after already cutting its staff by 32 percent. In a filing, adviser Seabury called the level “dangerously low,” and said PAL should have “not less” than $300 million in unrestricted cash at any given time.
PAL’s restructuring plan calls for returning 21 excess aircraft — a fleet reduction of nearly a quarter — and cutting $2.1 billion in aircraft-related and other obligations from its balance sheet. In addition, it has lined up $505 million in debtor-in-possession financing from shareholder Buona Sorte Holdings. And the airline has term sheets for another $150 million in exit financing.
On the fleet front, PAL is seeking to reject 19 leased aircraft. This includes two Airbus A320s, three Airbus A321s, six Airbus A330-300s, three Airbus A350-900s — half of its A350 fleet — two Boeing 777-300ERs and one de Havilland Dash 8-400. The airline and lessors have agreed to transition the balance of its leased fleet — 66 aircraft — to power-by-the-hour agreements to further reduce expenses.
“We move forward with renewed confidence, as today’s actions enable us to continue serving our customers and the Philippine economy long into the future,” said PAL President and Chief Operating Officer Gilbert F. Santa Maria in a statement.
U.S. Airlines Hope for Holiday Boost After Delta Variant Bite
The U.S. airline industry has pivoted en masse away from what has proven to be an overly rosy outlook for the recovery this fall. Hopes for a return of business travelers were dashed by delayed office returns that, coupled with the seasonal slowdown in leisure travel, has carriers looking ahead to the end-of-year holidays for a boost.
Airlines heaped blame for the slowdown on the Covid-19 Delta variant. Rising case counts took down August and September numbers, with all but Delta Air Lines forecasting continued weakness until the November and December holidays. Most carriers now forecast a loss in the third quarter — a difficult reality to be faced with after optimistic profit outlooks in July.
“I don’t think the variant changes much of anything,” Delta CEO Ed Bastian said of the recovery at the a Cowen investor conference last week. “The variant is forcing us all to realize this is a serious disease virus that we have to deal with. And we’re dealing with it probably on an even faster pace in terms of getting people vaccinated, the mandates that are coming out.”
Bastian added that he expects the variant has only delayed the recovery in business travel by roughly 90 days, or into the fourth quarter. Corporate demand stands at around 40 percent of 2019 levels, unchanged from July. Delta previously forecast an inflection point after Labor Day.
United Airlines Chief Commercial Officer Andrew Nocella reiterated Delta’s outlook on an at least 90-day delay in the return of business travelers. Speaking at the conference, he said the inflection point was delayed by at best three months and at worst to early in the new year.
But fewer business travelers mean airlines are again pulling back schedules. Delta, Southwest Airlines and United Airlines all revised down their capacity plans for the second half of 2022, while American expects third quarter numbers to come in at the low end of its previous guidance, or at roughly 80 percent of 2019 levels. Even discounter Frontier Airlines that reaped an outsize benefit from the leisure-first recovery has cut its schedule for the third quarter after being the first to raise alarms over the Delta variant.
The decidedly poor outlooks have carriers looking for something of a holiday gift — if not a miracle — this November and December. Executives speaking at the conference were nearly unanimous in saying early leisure bookings for the Thanksgiving, Christmas and New Years holidays are at or above pre-crisis levels.
“Even with [the] uncertainty … our book-to-business for the holidays continues to be very strong,” said American Chief Financial Officer Derek Kerr.
Robust pent-up demand, to use the popular pandemic turn of phrase, does not translate to profits for airlines. United was forced to recant its previously bullish profit forecast for the second and third quarters to losses as a result of the Delta variant slowdown. Frontier, Hawaiian Airlines, JetBlue Airways and Southwest will also post September quarter losses after either forecasting breakeven results or declining to guide altogether in July. And Alaska and Delta appear on track to report profits, albeit at lower levels than previously hoped.
Missing from these guides was the imminent expiration of the last tranche of federal payroll support on September 30. The three tranches of funds have covered the majority of airlines’ labor costs — in most cases their single largest expense line — since the pandemic began in March 2020. No executive, nor Cowen Airline Analyst Helane Becker, mentioned the potential fallout of this expiration in their comments last week.
But the labor situation today is starkly different to what it was a year ago when the first CARES Act was set to expire, let alone when the program began. American, Southwest and Spirit Airlines have all had operational difficulties as a result of staffing shortfalls this summer. The situation was so bad that both American and Southwest were forced to pare back schedules into the fall and winter.
These issues hiring mostly entry-level employees, as well as what has by and large been a robust return of travelers, has few worried of any furloughs or layoffs when payroll support protections expire. What it does mean is that there will increased pressure on airline management to either boost revenue or find cost savings elsewhere to return their bottom lines to the black.
United’s Recovery Forecast Delayed by 3-4 Months Due to Delta Variant Surge
United had an excellent July, and the carrier expected August traffic to exceed July’s and for business traffic to return in September. Neither of those things have happened. The Chicago-based carrier now expects its forecasts to be delayed by three to four months.
“We some some significant glimmers of hope in July and where we were going to be in August,” Chief Commercial Officer Andrew Nocella said at the Cowen & Co. Global Transportation Conference last week. “The crystal ball has been a little foggy, to say the least.”
In an investor updated filed to the Securities and Exchange Commission, the carrier revised its third-quarter capacity guidance down slightly to be at least 28 percent off 2019.
The carrier is evaluating its fourth-quarter capacity plans now. Bookings have stabilized since Labor Day, and the “holiday story is largely intact,” Nocella said. United will, however, fly fewer flights in the trough between Thanksgiving and Christmas than it had originally planned, he added.
A fundamental problem is supply greatly outstrips demand, particularly during leaner months, Nocella said, adding that this is an industry-wide problem and not only for United. “We were on the right trajectory; however, the supply and demand issue is tough to overcome,” he said. Yields remain low as low-yielding leisure customers continue to fill aircraft. “The next quarter or so are going to be difficult.”
There are some bright spots, however. Leisure demand to European countries that reopened for tourism shows the strength of pent-up demand, he said, citing United’s recently launched flights to Greece and Croatia. United has added flights to African countries and to India, where visiting friends and relatives traffic has endured. The carrier expects next summer to reveal strong transatlantic demand. “We feel pretty bullish,” Nocella said.
Transpacific demand, however, lags and will continue to remain weak for the foreseeable future. Before the pandemic, United operated as many as 11 daily flights to China. Now, that’s down to a handful per week, mainly because of strict crew quarantine rules that require the carrier to stop flights in Korea for crew changes.
The carrier’s 52 Boeing 777s powered by Pratt & Whitney engines remain on the ground, after an engine containment incident earlier this year. United doesn’t now need the lift, but it could by next spring, if transatlantic demand forecasts hold. United still is conducting maintenance on those aircraft and has retained all the staff needed to operate them, so the grounding will continue to weigh on the airline’s CASM, Nocella said. Although United is working with Pratt, Boeing, and the FAA on a fix for the issue, Nocella did not offer a day for when the aircraft will return to service.
United will continue operating all-cargo flights on its widebodies, at least for now. The carrier had begun re-converting its preighters back to passenger operations, but Nocella said that has stopped. In fact, United just returned five passenger 777s to the cargo operation, he said. Cargo likely will remain an important revenue stream even after the pandemic, but “airplanes need to go where passengers want to go,” he said.
Transat Hopes Revenue-Free Quarters Are Behind It
Transat CEO Annick Guerard hopes the worst of the pandemic is in the past. And while she’s optimistic about the beginnings of a recovery, she’s far from bullish. Last week’s results will “hopefully remain Transat’s last quarter with close to no revenue,” she told analysts on the company’s quarterly earnings call.
Transat is in the midst of a transformation, from package holiday operator to a national airline in Canada. The company exited the hotels business during the quarter and plans to sell its remaining assets and real estate later this fall. Package tours will remain a part of the business, but scheduled flights will take more prominence, as will flights across Canada.
The carrier also is transforming its fleet, getting rid of its remaining Airbus A310s and Boeing 737s, leaving it with just A321s and A330s. “As we expected, the A321neoLR proves to be exactly the versatile aircraft we need,” Guerard said. “It gives us operational flexibility and efficiency like we’ve never had before.”
The carrier also is working on new airline partnerships — this, after regulators shot down its planned merger with Air Canada — but Guerard declined to say which airlines but said news will be made public this fall, and that Transat will announce more than one partner. “We have strong assets to offer potential partners looking to increase their footprint between America and Europe and/or [southern destinations],” Guerard said. “And our approach is to start with simple bilateral agreements which will allow us to make quick wins while building a relationship of trust and this may lead this partnership to evolve into something more important and strategic.”
The carrier slowly has been ramping operations back up. Leisure travel — Transat’s bread and butter — started coming back this summer. The airline went from 10 weekly flights to 50 this month and expects to increase that to 70 next month. Domestic Canada routes recovered first, but Transat saw bookings to Paris and Faro, for example, start to return by later in the summer. Now that the U.S.-Canada air border has reopened, Transat is adding back transborder flights. Guerard said the carrier has restarted flights to about “90 percent” of its pre-pandemic destinations.
The booking curve remains short, Guerard noted, but that’s not a cause for worry. “We currently see good trends in the booking even if they tend to come in closer to departure dates than they used to,” she said.
Despite the rosy talk, the quarter was grim for Transat. The carrier lost CAD$98 million ($77 million) on just $13 million in revenue. But that’s not surprising. Transat’s latest quarter ended on July 31, but the carrier only resumed operations on July 30.
In Other News
- European authorities have signed off Italy’s €1.35 billion ($1.2 billion) capital injection into new national carrier Italia Trasporto Aereo (ITA). EU Antitrust Chief Margrethe Vestager said the funds were “in line with terms that a private investor would have accepted.” At the same time, the European Commission ruled that €900 billion in aid to beleaguered Alitalia was illegal, forcing the carrier or the carrier’s estate to pay back the subsidies. ITA, which the commission said is not responsible for its predecessor’s debts, will takeoff on October 15 with Alitalia closing its doors the day before.
- While everyone is focused on what airlines are mandating staff get Covid-19 vaccines, Qantas is ready to take mandates one step further and require jabs for all passengers on its international flights. The airline has yet to offer details of the policy, which CEO Alan Joyce unveiled in comments to the Trans – Tasman Business Circle last week, except that it will apply to all international flyers. Qantas plans to resume long-haul flights in December after suspending most operations when Australia closed its borders to most non-citizens in March 2020.
- WestJet budget arm Swoop and its flight attendants union have reached a tentative agreement, which now goes before the 200 employees for a ratification vote. If ratified, CUPE, the union, will have agreements in place with all three WestJet operating units, covering more than 4,000 flight attendants.